Analysis: Gold bugs are enjoying an early Christmas, with the price of the yellow metal surging ahead on an almost daily basis. The metal has leaped more than 32% in three months.

Analysis

Gold bugs are enjoying an early Christmas, with the price of the yellow metal surging ahead on an almost daily basis.

The metal has leaped more than 32% in three months, has doubled in less than three years and more than tripled from a multi-year low of around $251 in August 1999.

After adjusting for inflation, gold's record level in 1980 was equal to about $2250 at current prices, according to industry data. Gold surged then on high inflation linked to strong oil prices, Soviet intervention in Afghanistan and the effects of the Iranian revolution.

Bullion performed robustly for most of last week, climbing to a fresh peak on Thursday as the dollar weakened, but cooled off a bit on Friday. Gold traded in London at $836.00 an ounce, down from $844.80 late on Thursday.

Many investors avoided putting their money into bullion in the late 1990s, when central banks sold much of their stockpiles and invested instead in currencies such as the euro and dollar, but have since found a fresh enthusiasm for the metal as a safe haven after recent turmoil in the financial markets created by the sub-prime mortgage crisis in the United States and a subsequent jarring credit crunch.

Buying has been spurred by expectations that the Federal Reserve would cut US interest rates further. It has trimmed the cost of borrowing twice in recent months.

"There is a flood of money coming into gold at the moment. You can't really stand in the way. There are hundreds of things that are supporting the market," said Jeremy East, global head of metals trading at Standard Chartered Bank in London.

"It's a one-way street at the moment. Strong oil prices, a weaker dollar, sub-prime issues and a rush into safe haven - everything is supporting," he said.

Larry Young, a senior trader at Infinity Futures in the United States, said there could be a short-term pull-back in gold from recent highs, but he is betting it will jump to $1000 an ounce. He said the dollar does not appear headed for recovery anytime soon, and demand from gold buyers and investors remains strong.

"The gold bugs have always been there, but the chorus is getting louder," Young said.

During the past year or so, gold bugs said the dollar would collapse in the face of low US savings and the country's huge current account deficit, issuing dire predictions about the impact of inflation on the world's industrialised economies - but few experts paid much heed to the warnings.

Recent events have proved that gold investors were right. The greenback is sitting at a record low against the euro, has fallen sharply against the pound and is suffering the humiliation of being worth less than a Canadian loonie - the common name for that country's one-dollar coin.

For many years, bullion's champions complained about the extensive use of derivatives and claimed the financial sector was too dependent on credit. In the past fortnight, the world's biggest investment banks - Merrill Lynch and Citi- group among them - have been sacking chief executives and writing off billions of dollars of derivative positions.

Gold enthusiasts also point to high oil and food prices as evidence that their warnings about inflationary pressures are correct.

Some of the predictions made by gold bugs may be debatable, but it is possible to explain the metal's strength without believing them all.

The weakness of the dollar is one of the main factors for bullion's recent popularity and gold is regarded as an alternative currency these days.

As an investment tool, gold does present some problems - it is heavy and is not really portable in the same way as equities and currencies are.

Investors can, however, place their money into gold funds or invest in mining company shares or in the strong currencies of countries that produce the metal, such as Australia and Canada.

While gold enthusiasts describe the metal as the only "real" form of money and call for the return of the gold standard that was abolished decades ago, it is worth pointing that other precious metals are also performing strongly: silver has reached a 26-year peak, while platinum is at an all-time high.